The column SO controversial that 2 media outlets refused to publish it!

Well, that headline is total clickbait.

My wonderful wife, Barbara Stewart (check out http://www.barbarastewart.ca) has two separate columns: one is a bi-weekly newspaper column in 24 Hours, and another appears in online magazine Mrs. R. Both are great outlets for Barbara’s writing on women and finances. But a recent column of hers was deemed too ‘narrow’ for each platform. I thought it was a pretty good piece, so I am posting it here as a guest column rather than letting it go to waste. Enjoy!

To hedge or not to hedge

In case I lost you at the word “hedge”, let me say that this will not be an in-depth look at hedging techniques such as forward contracts or options. Instead, it’s a high-level look at when a currency hedge might make sense in your personal situation. A hedge allows you to fix an exchange rate for part or all of your portfolio, rather than being vulnerable to the whims of the currency market.

Three examples:

You are paid in U.S. dollars but your expenses are in Canadian dollars

A writer lives in Toronto but is paid by her New York-based publisher in U.S. dollars on a quarterly basis. She has no need for the US$ as all her expenses are Canadian. She doesn’t want to have to worry about fluctuations in the exchange rate because she wants to have the ability to plan for her cash flow. She can use forward contracts to lock in the exchange rate in advance for all of her quarterly payment dates.

You live in Canada but you travel regularly to the U.S.

A retired couple are spending more and more of their time in Florida. They worry about movements in the currency because they have a significant need for U.S. dollars for their lifestyle requirements. This will be an ongoing issue for them. In this case, they should consider opening a bank account in the U.S. and funding it on a regular basis by converting from Canadian to U.S. dollars. Rather than doing the conversion all at once and running the risk of a less attractive exchange rate, this will allow them to average in at different rates over time.

You are moving from Canada to the U.S.

A young couple recently started a new life in California. They sold their home in Toronto and the proceeds are in Canadian dollars. As they don’t know yet what this money will be used for (a home, travel?), it makes sense for them to partially hedge their bets and convert half of it into U.S. dollars right away. This way they are free to take some time to make decisions as to where they want to invest and what they want to invest in. Meanwhile they will be partly diversified in terms of their currency exposure.

As you can see, a hedge doesn’t always have to involve a complicated product. But if you are in a scenario like one of these, hedging is something that should be discussed with your banker or investment advisor. Although I normally add that people can also do it themselves, some forms of hedging are so complicated that outsourcing it will almost always make more sense.